Hedge fund Magnetar denies wrongdoing in CDO sale

(Crain's) -- A securities fraud lawsuit filed against Merrill Lynch & Co. in New York state court alleges Evanston-based hedge fund Magnetar Capital LLC took part in a scheme resembling one attacked last week by the Securities and Exchange Commission.

The lawsuit against Merrill Lynch doesn't name Magnetar as a defendant, and the hedge fund denies any wrongdoing. But a letter sent Friday to the judge overseeing the case alleges Merrill's sale of collateralized debt obligations, in which Magnetar was involved, is similar to transactions that spurred the SEC to file fraud charges against Goldman Sachs Group Inc. last week.

The letter to Judge Bernard Fried from attorney Jonathan Pickhardt, a lawyer representing the Dutch bank Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., known as Rabobank, alludes to Magnetar's involvement in a CDO transaction dubbed "Norma."

"Rabobank has alleged that Merrill Lynch engaged in precisely the same type of fraudulent conduct (as alleged by the SEC against Goldman) in the structuring and marketing of Norma through having failed to disclose that Norma's collateral pool had been selected to benefit short positions taken by Magnetar," Mr. Pickhardt, a partner at Quinn Emanuel Urquhart & Sullivan LLP, said in the letter.

In the Rabobank lawsuit filed in June, the bank is seeking to recoup $45 million it lost after the default and liquidation of the Merrill CDO, which was used to secure a $60-million loan to Merrill, now a unit of Bank of America Corp., by Rabobank.

"Rabobank has made a variety of false and misleading statements about Magnetar and its investments in mortgage CDOs," Magnetar said in a statement. "The allegation by Rabobank that Magnetar 'colluded with investment banks like Merrill Lynch' is baseless and defamatory. Further, Magnetar's investments in CDOs were based on a statistical strategy and expressed no fundamental view on the direction of the market."

Magnetar is led by CEO Alec Litowitz, who was global head of equities at Chicago-based Citadel Investment Group LLC before founding Magnetar in 2005.